OPIS Alert – Tier 3 gasoline resurfaces

Here’s Tom Kloza’s latest writeup on Tier 3 and sulfur credit prices:

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2021-03-09 04:50:16 EST

***Tier 3 Sulfur Gasoline Resurfaces as Issue for Some Refiners, Importers

Some refiners who have complained about the necessity of purchasing expensive Renewable Identification Numbers (RINs) have something else to complain about this week. After a long period of dormancy marked by little liquidity and interest, the price of Tier 3 sulfur credits have more than tripled from winter levels.

Tier 3 sulfur regulations were advertised to be a big deal back on Jan. 1, 2020 when refiners, importers and blenders were required to hit a 10-parts-per-million (ppm) threshold on all finished gasoline. Prior to that date, gasoline manufacturers, importers or blenders could use sulfur credits generated as far back as 2015 and 2016. Even today, parties can still produce a gasoline with as much sulfur as 80 ppm, but they need to hit the annual average of 10 ppm overall. They can do so via traditional desulfurization equipment or through the purchase of Tier 3 credits.

Before COVID-19 became a horrid acronym, the price of Tier 3 sulfur credits escalated to where bids were at $3,000 per 1 ppm per million gallons and offers were around $4,000. Some deals in early winter 2019 were recorded at $3,200.

The impact on an importer bringing in a piece of 50-ppm sulfur gasoline was quite drastic: purchasing the sulfur credits necessary to lower a 50-ppm batch to 10 ppm would have cost about 12.8cts/gal.

Flash forward to late 2020 and the end of a year that saw the lowest U.S.

gasoline demand since 1996. Worries about too little octane, overworked catalytic reformers, or too little desulfurization capacity were distant memories, and sulfur credits were assessed at only about $200 per 1 ppm per million gallons. Much like IMO, the Tier 3 issue was “the dog that never barked.”

However more recently, OPIS has heard of Tier 3 sulfur credits moving for about $800, one fourth of the high price in anticipation of Tier 3 but about four times the value seen late in 2020. There’s no clear reason as to why the credits have danced higher, although one prominent theory holds that some of the most complex refiners in the world were knocked out by Winter Storm Uri. A price of $800 would add up to additional costs of 0.08cts/gal on 1ppm per 1 million gallons, or about 3.2cts/gal on a 50-ppm piece of gasoline.

Refinery sources emphasize that the market for sulfur credits is extremely illiquid. Most believe that the next tipping point will arrive by the end of the second quarter, when the U.S. Environmental Protection Agency finally reports on the average sulfur content of gasoline in 2020. Ostensibly, last year should not have presented a huge challenge because of spare capacity.

Octane expert George Hoekstra of Hoekstra Trading suggests that smart refiners could have banked plenty of credits in 2020 by producing two or three parts per million sulfur batches of gasoline. Double digit percentage drops in demand led to an octane surplus, and refinery utilization was as low as it has been in 35 years.

“Next year will be the critical year,” Hoekstra told OPIS. “We’ve lost some refineries and the true demand recovery looms after 2021.”

Until demand returns to something in the 9-million-b/d neighborhood, there is plenty of capacity to meet sulfur requirements and no shortage of high-octane components. It’s not known how much desulfurization will be lost by rationalized refineries or the repurposing of some plants to manufacture renewable diesel.

But consider the plight of a small merchant refiner that might struggle with desulfurization as well as compliance with the Renewable Fuel Standard.

March 9 saw the highest Renewable Volume Obligation cost ever recorded at about 15.5cts/gal, meaning that a pure merchant refiner or importer might face as much as $6.50 in additional costs even if they hit all the required specifications. An off-spec piece of 50-ppm sulfur gasoline would hypothetically add another 3.2cts/gal to the cost, putting the manufacturer nearly $8/bbl in the hole before the difference between the spot gasoline price and the local crude blend was measured.

It’s simply one more reason why gasoline margins calculated for various refineries require more calculus this year and next. A refiner that blends plenty of renewable components and hits average sulfur requirements might make twice as much money as a processor that does not.

–Reporting by Tom Kloza, [email protected]; Editing by Michael Kelly, [email protected]

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